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How Payday Credit Access Affects Overdrafts and Other Outcomes

Authors


  • The authors thank Bob DeYoung (the Editor), Brian Melzer, and two anonymous referees for helpful comments. The views expressed in this paper are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of New York, the Federal Reserve System, AEI, or AIG. This paper replaces “Payday Holiday: How Households Fare After Payday Credit Bans,” by Morgan and Strain.

Abstract

Despite a dozen studies, the welfare effects of payday credit are still debatable. We contribute new evidence to the debate by studying how payday credit access affects bank overdrafts (such as returned checks), bankruptcy, and household complaints against lenders and debt collectors. We find some evidence that Chapter 13 bankruptcy rates decrease after payday credit bans, but where we find that, we also find that complaints against lenders and debt collectors increase. The welfare implications of these offsetting movements are unclear. Our most robust finding is that returned check numbers and overdraft fee income at banks increase after payday credit bans. Bouncing a check may cost more than a payday loan, so this finding suggests that payday credit access helps households avoid costlier alternatives. While our findings obviously do not settle the welfare debate over payday lending, we hope they resolve it to some extent it by illuminating how households rearrange their financial affairs when payday loan supply changes.

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